To obtain financing when they are not eligible for a traditional bank loan, or to ensure that the financing granted is more substantial, some companies do not hesitate to pledge their stock as collateral. This alternative method of financing, known as stock pledging, is set to expand.
Will inventory pledging follow in the footsteps of factoring?
Today, stock pledging is a small market in France, with only 2.5 billion euros of outstanding loans secured, out of a total of 1,214 billion euros of outstanding business loans.
However, in the same way as factoring, which enables a company to obtain early repayment of its receivables through a third-party organization, inventory pledging could be set to expand over the next few years.
At present, the French market for stock collateral is at about the same level as that for factoring two decades ago. However, in the space of 15 years, factoring has taken the lead in short-term financing, overtaking bank overdrafts.
The factoring market is now worth over 327 billion euros, with annual growth of 12.7% by 2021.
An environment conducive to the development of inventory pledging
Stock pledging could well follow suit, and really take off in the years to come. Industry specialists believe that the context is favorable for the development of this alternative financing method.
To begin with, several pieces of legislation have simplified the implementation of stock pledges since 2016. In particular, the Pacte Act has resulted in companies being authorized to pledge new assets, while putting an end to security interests that were no longer justified. As an example, a company can now pledge the solar panels installed on the roof of its offices.
Specialists also believe that the digitization of companies could play a role in the development of stock pledging. Indeed, the factoring market really took off when the digitization of invoices became possible.
The final argument put forward by industry specialists is that the end of public support schemes for businesses could, for a number of them, result in more difficult access to traditional bank loans.
There are currently only 3 billion euros in pledged inventories, but the need to find an alternative to traditional financing may well become apparent, especially as the resources are there. Specialists estimate that the total amount of stocks that can be pledged is 700 billion euros.
Inventory pledging should not be seen as a replacement for traditional financing such as bank loans, overdrafts or factoring, but as a complement. This method does, however, present a greater risk when it comes to pledging stock with dispossession, which deprives the company of partial or total access to its goods.